India Aims for 5.3% Fiscal Deficit in 2025 Budget
Source and Citation: Article excerpt from Economic Times, January 12, 2024
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Analysis of this news for a layman
Fiscal deficit refers to the government’s financial shortfall when its expenses exceed its revenue. For the 2024-25 budget, the fiscal deficit is projected to be around 5.3% of India’s Gross Domestic Product (GDP), as suggested by the Finance Ministry. This represents an improvement from the approximately 6% expected for the fiscal year ending in March 2024. The interim budget, which precedes the general elections, is unlikely to include significant announcements.
The 5.3% deficit target strikes a balance between the need for fiscal consolidation after pandemic-related spending and the necessity for public investments to stimulate economic growth. Achieving a deficit below 4.5% by 2025-26, as guided by the Fiscal Responsibility and Budget Management (FRBM) Act, requires a gradual approach.
Capital spending is anticipated to normalize from recent heightened levels, with a budget allocation of Rs 10.2 lakh crore in 2025. Further increases may be challenging, considering the capacity constraints of states to effectively utilize funds for infrastructure projects.
With elevated subsidy bills for food and liquefied petroleum gas (LPG) continuing into the next year, fiscal adjustment is expected to rely more on buoyant tax revenue collections than expenditure cuts, according to analysts.
Impact on Retail Investors
For stock investors, a credible fiscal deficit target indicates a balance between the need for economic growth and the government’s commitment to economic stability. A gradual consolidation approach also demonstrates the government’s dedication to reforms.
However, deviations from the deficit target can impact the currency and bond yields. Therefore, monitoring execution on a monthly basis is essential. Investors should keep an eye on indicators such as net borrowing levels and 10-year Government Securities (G-Sec) rates.
Sustained spending on infrastructure and public capital expenditure is positive for materials, construction, cement, and banking stocks in the long run. However, a moderation in budget allocations from their peak levels may cause temporary underperformance in these sectors.
Overall, a reasonable deficit target aligned with the FRBM Act provides confidence in the macroeconomic environment for investors. It is advisable to allocate around 60% to equities and invest in stocks of firms benefiting from the structural demand driving India’s growth story.
Impact on Industries
Infrastructure sectors are expected to continue benefiting from healthy government capital spending, albeit at a rationalized level:
- Construction Materials: Cement and steel industries are likely to benefit from ongoing road and railway capital expenditure.
- Construction Firms: Companies in the construction sector may experience margin improvement due to railway and metro project execution.
- Banking: Banks could witness growth in capital expenditure loans, as funding needs remain strong.
However, moderation in unsustainable expenditure may pose risks:
- Infrastructure & Capital Goods: Valuations in these sectors may face pressure due to slower awarding activity.
- Real Estate and Fast-Moving Consumer Goods (FMCG): These sectors may gain as inflation cools off with gradual fiscal tightening.
- Exporters: Export-oriented businesses may benefit from reduced currency volatility as deficits trend lower.
- Transport Sectors: Fiscal prudence that balances infrastructure investments is preferred in these sectors.
Overall, fiscal consolidation supports services, consumption, and technology stocks.
Long Term Benefits & Negatives
Achieving fiscal deficit targets offers several long-term advantages but also presents potential challenges:
- Macroeconomic stability reduces vulnerability to currency shocks.
- Lower risk premium associated with investments attracts more capital.
- Provides room for the Reserve Bank of India (RBI) to implement growth-supportive policies.
- Strengthens the credit rating profile, increasing global investor confidence.
- Builds a fiscal buffer for future crises and structural shifts.
- Managing trade-offs between growth and spending adjustments.
- Overachievement of targets may lead to austere policies.
- Ambitious tax buoyancy improvements require rapid formalization of the economy.
- Relying on disinvestment to meet deficits may lead to populist backlash.
- Shifting expenditure from public to private capital expenditure presents challenges.
Balancing fiscal consolidation with pragmatic budgeting is essential to minimize downsides.
Short Term Benefits & Negatives
In the short term, setting reasonable fiscal deficit targets balances competing needs:
- Signals a commitment to fiscal sustainability, lowering bond yields.
- Adequate infrastructure spending cushions against economic slowdown risks.
- Comfortable tax revenue positions without drastic measures.
- Assurance of public capital expenditure allocation to sectors impacted by it.
- Confidence for sovereign rating upgrades.
- A sharp cutback risks derailing growth momentum.
- Ambitious revenue optimism relies on uncertain income visibility.
- Wider-than-expected deficits if targets are not met.
- Forex fluctuations if global turmoil leads to rising crude oil prices.
- Increased market uncertainty due to the budget preceding the elections.
Careful navigation of the fiscal path is required in the coming year to maintain stability while avoiding underconsumption.
Potential Impact of 5.3% Fiscal Deficit Target in FY25 on Companies
Indian Companies Likely to Gain:
- Infrastructure and Capital Goods Companies (Larsen & Toubro, Tata Motors, Bharat Heavy Electricals): Continued commitment to infrastructure spending (railways, roads, civil aviation, defense) through capex allocation likely benefits these companies with project contracts and equipment orders.
- Public Sector Banks (SBI, Bank of Baroda, PNB): Increased government spending could lead to higher loan demand from infrastructure and related sectors, boosting loan growth and profitability for public banks.
- Cement and Construction Companies (ACC, Ambuja Cements, UltraTech Cement, Godrej Properties, L&T Construction): Infrastructure spending translates to higher demand for cement and construction materials, benefiting these companies.
- Metal and Mining Companies (JSW Steel, Tata Steel, Hindalco, Vedanta): Increased infrastructure and construction activities will likely boost demand for steel, aluminum, and other metals, benefiting these companies.
- Renewable Energy Companies (Tata Power, Adani Green Energy, Suzlon Energy): Focus on civil aviation could involve investments in airport infrastructure, potentially providing opportunities for renewables integration and energy efficiency solutions.
- Positive: Continued infrastructure focus and potential for higher economic growth could lead to positive sentiment towards these sectors, boosting their stock prices.
Indian Companies Likely to Lose:
- Consumer Discretionary Companies (Titan Company, Havells India, Dabur): Slower pace of capex spending might curtail growth in disposable income, potentially impacting demand for non-essential goods.
- Oil & Gas Companies (ONGC, Reliance Industries): High subsidy bill might limit government’s ability to increase fuel prices, potentially impacting margins and profitability of these companies.
- Pharmaceutical Companies (Cipla, Dr. Reddy’s Laboratories, Sun Pharma): High subsidy allocation might limit government spending on healthcare infrastructure and public health programs, potentially impacting growth for these companies.
- Mixed: Slower capex and potential headwinds for specific sectors could lead to mixed sentiment, with some companies and sectors facing downward pressure.
- Impact on global companies is less direct and depends on their exposure to Indian infrastructure and related sectors.
- Companies involved in infrastructure technology, equipment supply, and construction materials could benefit indirectly from increased Indian spending.
- Global commodity companies supplying metals, minerals, and energy for infrastructure projects could see increased demand.
Overall, the 5.3% fiscal deficit target presents a mixed picture for companies. While infrastructure and related sectors stand to gain, slower capex and high subsidies could impact other sectors. Investor sentiment will likely depend on the specific allocation of capex and its impact on individual companies and sectors.
Note: This analysis is based on the limited information provided. More comprehensive research would be required for a definitive assessment of the impact on specific companies.